No magic answer to level GST playing field

AFTER the release of a string of disappointing statistics on Monday, financial markets now believe there is an 85 per cent chance that the RBA will cut rates by at least 25 basis points when it meets today.

It is not hard to see why: flat retail sales, a 2.9 per cent fall in company profits in the September quarter, a fall in unofficial inflation rates based on the TD Securities-Melbourne Institute monthly inflation gauge, the eighth consecutive month that job ads fell and a further contraction in the manufacturing sector.

An even more compelling reason for a rate cut came from the latest Cost of Living Survey by Lonergan Research, which found that 77 per cent of Australians believe their day-to-day expenses have increased faster than the official inflation rate of 2 per cent in the past 12 months.

Perceptions have a profound influence on consumer behaviour; if consumers believe prices are rising they will change their spending and savings habits accordingly, which ultimately influences economic growth and inflation. Retailers argue that a fall in interest rates will help consumer perceptions and thereby lift sales during the crucial weeks leading up to Christmas.

But interest rates are only part of the retail solution. Online competition from international websites plays another role. While part of the problem for local retailers is their international counterparts generally have better sites, offer relatively cheaper products and provide a wider variety of products, they do get a free kick when it comes to tax.

Right now international online websites don't pay GST on products with a price tag of less than $1000. This is one of the highest thresholds in the world - in Britain it is as low as £15 - and retailers have argued vigorously that the disparity is hurting their business because local products attract a 10 per cent GST.

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In a world where price transparency and global spending is becoming increasingly important, calls to level the tax playing field will intensify.

A study to be released on Tuesday called the Ernst & Young Customer Experience survey shows how important price and online has become. The survey reveals that 33 per cent of people say they are increasing the amount they spend shopping online for Christmas presents from last year. It says price is the number one consideration when it comes to buying online, along with fast and reliable delivery. Put simply, jingoism doesn't cut it any more. If a product can be bought cheaper overseas, then so be it.

In a separate study that was commissioned by the National Retail Association, Ernst & Young calculated that if the federal government kept the GST threshold at $1000, it would cost state governments $2.49 billion in forgone GST revenue over three years.

The study found that besides lost revenue collections, other implications include a $6.5 billion reduction in GDP by 2015 due to reduced domestic retail purchases and the loss of up to 118,700 jobs, including up to 33,400 as a direct result of the low value threshold.

These are seriously big numbers and explain why the states, including Victoria and New South Wales, have started arcing up for changes in taxes.

Indeed NSW Treasurer Michael Baird argues that not only does the current threshold mean that states forgo more than $600 million of GST revenue a year on transactions in goods and more than $1 billion a year on transactions in services, it also provides a tax advantage for foreign retailers.

Despite this, the federal government opted not to include the impact of jobs or GDP in its scoping brief when it set up the Low Value Parcel Processing Taskforce, which was in response to a report released last year by the Productivity Commission.

The taskforce recently released its recommendations, warning that there were no quick-fix solutions. It recommended the preparation of business cases and ''possible'' implementation plans.

Nick Greiner and a group of other former premiers released a separate report on Friday calling for an immediate reduction in the threshold to $500.

Three days later, Assistant Treasurer David Bradbury outlined an interim response to the taskforce's recommendations. It was designed to quell the backroom pressure from the states and local retailers but it effectively boiled down to taking no action until more reviews have taken place.

It is not surprising given the Gillard government is entering an election year and tampering with the GST threshold would lift the price of overseas products, which would not be a vote winner.

On Monday, Bradbury agreed there was a tax disparity but argued that ''to act suddenly in lowering the threshold without making significant investments in the way in which we process parcels, both through customs and Australia Post'' could seriously disrupt the parcel processing network. What he didn't mention was there are other ways to process the tax besides customs. One option is to shift the tax collection to the point of purchase, which would mean shifting it to foreign retailers. But this isn't about finding a solution, it is about passing a very hot political potato.